Climate change is rapidly becoming a financial risk that investors, banks, and insurers can no longer ignore. Floods, hurricanes, and other extreme weather events are increasing in frequency and severity, causing billions of euros in damages worldwide. However, despite these rising threats, financial markets have yet to fully account for climate risks, particularly in the real estate sector. The Dynamic Integrated Flood Real Estate Impacts (DIFREI) model developed by IVM-VU aims to bridge this gap by offering a structured way to evaluate both direct and financial risks associated with flooding.
Flood risk vs. Flood experiences
One of the central questions asked by real estate investors is how flood risk affects property prices. There are two different ways through which flooding can impact the value of real estate: a risk-based and a behavioural perspective. Risk-based pricing assumes that homebuyers objectively consider flood risk when determining a property’s value. Higher flood risk reduces buyers’ willingness to pay, as insurance costs and potential damages decrease the attractiveness of flood-prone properties.
However, people rarely behave rationally on the housing market. Flood events function as psychological triggers, causing temporary market corrections in flooded regions. Research indicates that housing prices drop between 4% and 20% after a flood, but these effects fade within five to six years. This means that people’s attitudes towards flooding are often more important than the actual risk. For instance, Baldauf et al. (2020) found that flood risks only impact prices in areas where residents already believe in climate change, while homes in climate change “denier” neighbourhoods do not sell at a discount at all.
Bridging Climate Risk and Real Estate Finance
The DIFREI model developed by IVM-VU attempts to combine these housing market dynamics triggered by flooding with financial impacts for investors in real estate. DIFREI provides a forward-looking approach, bridging financial and climate risks in real estate. The model quantifies both direct damages from flooding and financial ripple effects, such as impacts on mortgage credit risk for banks or total real estate portfolio values. The model not only highlights vulnerabilities but also helps stakeholders develop adaptation strategies to mitigate future risks.
Figure 2. General overview of the Dynamic Integrated Flood Real Estate Impacts (DIFREI) model.
As climate change accelerates, tools like DIFREI will be essential for making informed decisions in real estate investment. By integrating financial and climate science, the model provides a much-needed roadmap for managing climate-related risks in an increasingly uncertain world.
Want to learn more? Find the preprint here or contact t.endendijk@vu.nl
Figure 1 (right). Impacts of flooding on climate change “denier” and “believer” neighbourhoods (based on Baldauf et al., (2020)).
⇒ For more info also check out our results page.
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This project has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 101036599.
This project has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 101036599.
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Short summary: A story about Jan and Maria during extreme precipitation.
Theme: Flooding
End user: Citizens